Has the regulator implemented rules in relation to remuneration paid by banks to its staff?

As France is a member state of the European Union, the Capital Requirements Regulation (CRR) is directly applicable in France, and the provisions of the Capital Requirements Directive IV (CRD IV) have been transposed into French law by means of Ordinance (Ordonnance) n° 2014-158 of February 20, 2014 (the Ordinance), Decree (Décret) n° 2014-1316 of November 3, 2014 (the Decree), and several ministerial orders (Arrêtés) of November 5, 2014 (the Orders).

The principles developed in the “European Union” section above are therefore directly applicable in France.

What categories of staff are caught by the regulator’s rules?

In accordance with the transposition of CRD IV into French law as described above, Article L. 511-71 of the Code applies the relevant requirements to the following categories of staff:

  • those persons (who must be at least two in number pursuant to Article L. 511-13 of the Code) who are in charge of the actual management (direction effective) of the bank (in the case of French branches of non-French banks, at least two persons must in charge of the actual management of the branch);
  • risk takers;
  • staff engaged in control functions, and
  • any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, the professional activities of whom have a significant incidence on the risk profile of the bank or the group of which it is a part.

What are the key regulatory rules?

In accordance with the transposition of CRD IV into French law as described above, Article L. 511-71 of the Code requires that the firm’s remunerations policies should be in line with the business strategy, objectives, values and long term interests of the firm, and incorporates measures to avoid conflicts of interest and should be consistent with and promote sound and effective risk management. The policy should not encourage the taking of risk beyond a risk level defined by the firm.

Pursuant to Article L. 511-72 of the Code, the Board of Directors (or in those firms with a two-tier management, the Supervisory Board) is required to adopt and review on a regular basis the general principles of the bank’s remuneration policy and supervise the application thereof. In accordance with the CRD, such application must be reviewed annually by a central and independent internal review (Code, Article L. 511-74). Personnel exercising a supervisory and control function must be remunerated as a function of the realisation of the objectives linked to their role, independently from the performance of those fields of activity over which they exercise such supervision and control (Code, Article L. 511-75).

In addition, Article L. 511-73 implements a “say on pay” principle by providing that the shareholders of the bank must be consulted on an annual basis with respect to the global remuneration to be paid to those persons covered by the rules.

Are bonuses subject to the regulator’s rules?

Consistent with the transposition of CRD IV into French law, the Code enunciates several principles regarding variable remuneration (bonuses).

Article L. 511-77 of the Code requires the following:

  • Where variable remuneration takes performance into account, the remuneration must be calculated on the basis of a combined evaluation of the individual performance of the relevant member of personnel, those of his or her operation unit and the global results of the firm in question. Performance measurement must take into account all of the risks to which the bank is susceptible to being exposed to, as well as liquidity requirements and the cost of capital.
  • Performance evaluation must be effected on a multi-annual basis and the payment of the variable portion of remuneration must be made over a period which takes into account the economic cycle of the bank.
  • The payment of a guaranteed bonus should be exceptional, only occur where the firm has a sound and strong capital base and it should be limited to the first year of employment.

In accordance with CRD IV, Article L. 511-78 of the Code provides that the basic fixed to variable ratio is 1:1 (i.e. bonuses are required to be equal to fixed salary paid to an individual), although this ratio can be increased to 2:1 with shareholder approval (with a quorum of 50% of shareholders, 66% of votes in favor would be required; and, if that quorum is not reached, 75% of votes in favor). Personnel affected by such ceilings are not entitled to exercise, directly or indirectly, any voting rights attached to shares owned by them. The bank is required to inform the French banking authority (Autorité du Contrôle et de Résolution (ACPR)) of the ceiling to be proposed to the meeting of shareholders and to provide justification for such proposal, as well as informing the ACPR of the result of the vote (Code, Article L. 511-78).

For the purposes of calculating the maximum ratio, the use of deferred and bail-in-able instruments is encouraged by through the application of a notional discount factor to up to 25% of total variable remuneration provided that it is paid in instruments which are deferred for more than five years (Code, Article L. 511-79).

France has not availed itself of the discretion granted to Member States under CRD IV to lower the upper limit set for bonuses to less than 200%.

In accordance with CRD IV, Article L. 511-80 of the Code provides that remuneration packages concerning compensation or buy-outs of previous employment contracts (golden hellos) must be aligned with the firm’s long-term interests. At least one-half of variable remuneration must be paid in the form of shares or equivalent property rights or other instruments capable of being converted into equity (Code, Article L. 511-81).

At least 40% of variable remuneration must be postponed for a period of at least three years (the duration of such postponement is fixed taking into account the nature of the firm, the risks to which it is exposed and the activity of the relevant member of personnel). However, for variable remuneration of particularly large amounts, the percentage is increased to 60% and must also take into account the economic cycle of the firm. In no event may variable remuneration be paid more quickly than on a pro rata temporis basis (Code, Article L. 511-82). In all cases, the actual payment of variable remuneration, including the percentage required to be postponed under the foregoing principles, must take into account the financial condition of the bank and actual performance (Code, Article L. 511-83).

The total amount of variable remuneration may be subject to malus and claw-back arrangements. Payment of discretionary pensions must be effected by way of equity and is postponed five years from the departure of the relevant personnel (Code, article L. 511-84).

Persons subject to the limitations on remuneration may not use individual hedging arrangements or insurance to limit application of the foregoing rules (Code, Article L. 511-85).

Special rules apply to banks which benefit from exceptional public intervention (i.e., “bail outs”). In such case variable remuneration is strictly limited when it is incompatible with the ability of such institutions to maintain own funds at a sufficient level and to emerge within the stipulated period from the public intervention programme. Particularly strict rules apply to payment of variable remuneration in such cases to senior management (Code, Article L. 511-86).

What is the position concerning role based allowances?

As a member state of the European Union, France is subject to the rules promulgated under CRD IV.

Do the regulator’s rules on remuneration have extraterritorial effect?

As a member state of the European Union, France is subject to the rules promulgated under CRD IV.

Do you anticipate further reform in this area?

CRD IV provides that the Commission, in close cooperation with the EBA, will submit a report to the European Parliament and to the Council of the EU, together with a legislative proposal if appropriate, on the remuneration provisions contained within it and CRR. This report is to be submitted by June 30, 2016.

Must an institution’s remuneration policy be disclosed to the regulator?

As a member state of the European Union, France is subject to the rules promulgated under CRD IV.